IN SEARCH OF SUSTAINABILITY

PRIVATE RETIREMENT SYSTEMS

AND SUSTAINABILITY:

UNITED STATES

An investor initiative in partnership with UNEP Finance Initiative and UN Global Compact
 THE SIX PRINCIPLES

PREAMBLE TO THE PRINCIPLES

As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we
believe that environmental, social, and governance (ESG) issues can affect the performance of investment portfolios (to
varying degrees across companies, sectors, regions, asset classes and through time). We also recognise that applying these
Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary
responsibilities, we commit to the following:

1
We will incorporate ESG issues
into investment analysis and
decision-making processes.

2
We will be active owners and
incorporate ESG issues into our
ownership policies and practices.

3
We will seek appropriate
disclosure on ESG issues by
the entities in which we invest.

4
We will promote acceptance and
implementation of the Principles
within the investment industry.

5
We will work together to
enhance our effectiveness in
implementing the Principles.

6
We will each report on our
activities and progress towards
implementing the Principles.

PRI's MISSION
We believe that an economically efficient, sustainable global financial system is a necessity for long-term value creation. Such
a system will reward long-term, responsible investment and benefit the environment and society as a whole.

The PRI will work to achieve this sustainable global financial system by encouraging adoption of the Principles and
collaboration on their implementation; by fostering good governance, integrity and accountability; and by addressing
obstacles to a sustainable financial system that lie within market practices, structures and regulation.

PRI DISCLAIMER
The information contained in this report is meant for the purposes of information only and is not intended to be investment, legal, tax or other advice, nor is it intended
to be relied upon in making an investment or other decision. This report is provided with the understanding that the authors and publishers are not providing advice on
legal, economic, investment or other professional issues and services. PRI Association is not responsible for the content of websites and information resources that may
be referenced in the report. The access provided to these sites or the provision of such information resources does not constitute an endorsement by PRI Association of
the information contained therein. Unless expressly stated otherwise, the opinions, recommendations, findings, interpretations and conclusions expressed in this report
are those of the various contributors to the report and do not necessarily represent the views of PRI Association or the signatories to the Principles for Responsible
Investment. The inclusion of company examples does not in any way constitute an endorsement of these organisations by PRI Association or the signatories to the
Principles for Responsible Investment. While we have endeavoured to ensure that the information contained in this report has been obtained from reliable and up-to-date
sources, the changing nature of statistics, laws, rules and regulations may result in delays, omissions or inaccuracies in information contained in this report. PRI Association
is not responsible for any errors or omissions, or for any decision made or action taken based on information contained in this report or for any loss or damage arising from
or caused by such decision or action. All information in this report is provided “as-is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained
from the use of this information, and without warranty of any kind, expressed or implied.

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 PRIVATE RETIREMENT SYSTEMS AND SUSTAINABILITY: UNITED STATES | 2020

CONTENTS

INTRODUCTION 4

PUBLIC SECTOR PENSION PLANS 7

PRIVATE SECTOR WORKPLACE RETIREMENT PLANS 11

SERVICE PROVIDERS 18

REGULATORY FRAMEWORK 22

INDIVIDUAL RETIREMENT ACCOUNTS 23

3
 INTRODUCTION
The US is the world’s biggest funded pension market.
More than 700,000 private sector workplace retirement
plans cover 136 million participants – active members and
retirees - and roughly 6,000 state and local public sector
plans serve 14.5 million active (working) members and 10.3
million retirees.1 2 More than 5 million people are covered
by the federal employees’ retirement system, and just over
half of members are active.3 Some 46 million US households
own at least one personal retirement savings account in the
form of an Individual Retirement Account (IRA) and total US
retirement system assets are estimated at over $30 trillion
(Tables 1 and Figure 2).4 5
1 EBSA Private Pension Plan Bulletin December 2018, Public Plans Database
2 Publicplansdata.org
3 Federal Employees’ Retirement System, Summary of Key Trends, Congressional Research Service 02/2018
4 ICI Research Perspective, Vol. 25 No. 10, December 2019
5 ICI Quarterly Retirement Market Data, 2Q 2019; excludes annuities
4
At first glance, the US retirement system appears
fragmented. However, there is a relatively high degree of
concentration among public and private sector workplace
plans and their service providers. Conversely, the personal
retirement market is fragmented, with individual account
holders employing a large number of local advisers, albeit
with the brokerage and custody arms of the market serviced
by large domestic and multinational firms.
The policy environment in the US is considerably less
supportive of responsible investment than those in Australia
and the UK. This is one of the factors behind the low
number of private sector signatories to the Principles for
Responsible Investment.
 PRIVATE RETIREMENT SYSTEMS AND SUSTAINABILITY: UNITED STATES | 2020

Table 1: US Market Structure. Sources: multiple

PUBLIC SECTOR PRIVATE SECTOR IRAs

DB DC DB 401(K) Other DC

Total assets ($ State and local 403(b) and 457 3,382 6,200 560 11,025 est
billion) 4,819 plans 1,460;
Federal 1,909 Thrift Savings
Plan 654

PRI signatories 23% DB = 0 n/a (non-

as % total assets 401(k) < 1 institutional asset
ownership)

Sector Top 10 = 34% of assets Top 100 funds = Top 801 funds Highly
concentration 50% of assets (0.15%) have 42% fragmented
of assets

Service provider Top 10 investment consultants dominate tax-exempt institutional advisory market Increasing
concentration Increasing concentration among recordkeepers concentration
among
recordkeepers

Asset Managers: top 10 asset managers for DB have >20% of assets, top 10 for DC have >50% of
assets

Regulator Federal, state or county DOL (EBSA), Treasury Department, SEC for pooled Treasury for
investment vehicles and investment advisers operation of
IRAs, SEC for
funds and
advisors, DOL

Governance Fiduciary board or trustees Employer is a plan sponsor. Trustees administer and Advisers usually
structures manage the plan, unless a separate committee is operate under
designated for investments. All are fiduciaries. “Suitability
standards”

Asset allocation Equity 48% Equity 31% Equity 43%, TDF (Saver in their
(median data, Fixed Income Fixed Income 21% 30s)
individual plans 22% 49% Balanced 3%
may vary widely) Real Estate 8% Other 20% Fixed Income 7% Equity 51%
Hedge Funds 7% GIC 9% TDF 20%
Other 15% Note: De-risking Other 17% Balanced 7%
activity acceler- Fixed Income 5%
Note: Predom- ating Note: balanced Other 16%
inately growth and TDF include
assets the other asset
classes

Key barriers Legal interpretation Prioritisation/ ERISA/fiduciary responsibilities Education, choice

to system Board structure and composition DB end game Focus on cost
sustainability Lack of consensus on implementation Trustee capability Restrictions on defaults

Sources: Investment Company Institute, The US Retirement Market Fourth Quarter 2019; PublicPlansData.org; Milliman 2019 Corporate Pension Funding Study; other sources as mentioned
throughout text

5
 Defined benefit plans still dominate public sector retirement provision. However, since 1992 over 50% of US retirement assets
have been held in individual account-based retirement savings plans, including private sector employment-related defined
contribution plans and IRAs. IRAs and 401(k) plans are the fastest-growing components of the US retirement system in terms
of assets.

Figure 1: Assets in US retirement system, year-end, $ billion (excluding annuities). Source: Investment Company
Institute, The US Retirement Market Fourth Quarter 2019

35000

30000

25000
11025

20000
7292

6728
15000

4488 5175
2114
3299
10000
2651
1590
3846 3382
3584
3051 3003 560
1071
5000 731 853
2228 514
2067 2126
402 419 6200
562 4406
1791 2193 2718
0
1999 2004 2009 2014 2019

401 (k) Other private sector DC Private sector DB Public sector DC Public sector DC IRA

Public sector = Plans for federal, state and local government employees including TSP.

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 PRIVATE RETIREMENT SYSTEMS AND SUSTAINABILITY: UNITED STATES | 2020

PUBLIC SECTOR PENSION PLANS

Although their share of the overall pension system is
declining, federal, state and local government employee
plans represent a substantial asset base of over $8.8 trillion.
FEDERAL PLANS
Federal employees generally benefit from a combination of
an annuity (funded by employer contributions and interest)
and retirement savings built up in the Thrift Savings Plan
(TSP). TSP has assets of over $650 billion, making it the
largest retirement plan in the US. It is similar to a 401(k)
and consists of low-cost building block funds that can be
combined into lifecycle strategies. The characteristics of
the funds offered by TSP are defined by law and its board
must seek Congressional approval for any changes to the
investment instruments permitted in the plan. With that in
mind, introducing responsible investment practices could be
a complex process.
STATE AND LOCAL GOVERNMENT
PLANS
State and local retirement assets are held in trust funds that
are fed by employer and employee contributions. Total DB
assets held in state and local government plans were $4,819
billion at the end of 2019.6
Despite the large number of individual plans, the public
sector retirement system is relatively concentrated. The
sector is dominated by the two big California state systems,
the California Public Employees Retirement System
(CalPERS) and the California State Teachers Retirement
System (CalSTRS), with combined assets of more than
$500 billion.7 Nationwide, the top 10 plans by assets make
up 34% of total state and local DB assets and 35% of
active members (Table 2). The Principles for Responsible
Investment count the top three state plans amongst their
signatories. Signatories account for 23% of state and local
DB assets, even though there are only 19 signatories among
the 190+ plans in the Public Plans Database.

Table 2: Assets and participants, top 10 state and local plans, 2018. Source: Public Plans Database, UN PRI Signatory
database

ACTUARIAL ASSETS PRI SIGNATORY

RANK PLAN NAME ACTIVE PARTICIPANTS
$ MILLION YES/NO

1 CalPERS 326,182,000 865,290 Yes

2 CalSTRS 190,451,000 449,595 Yes

3 NY State and Local ERS 168,246,000 500,945 Yes

4 Florida RS 156,104,350 516,825 No

5 Texas Teachers 154,051,000 872,999 No

6 New York State Teachers 117,859,500 264,590 No

7 Wisconsin RS 101,410,500 256,933 No

8 Ohio PERS 84,267,000 292,547 No

9 Georgia Teachers 75,024,364 226,039 No

10 Virginia RS 73,204,795 331,959 No

Total 1,446,800,509 4,577,722

Top 10 as share of total state and 34% 35% PRI signatories

local government DB represent 23% of total
assets and 21% of total
participants

6 Investment Company Institute, The US Retirement Market Fourth Quarter 2019

7 These plans can only serve the employees of their state, so fund size can reflect state population size

7
 In principle, public plans are well-placed to introduce responsible investment practices. In contrast to private sector DB plans
in the US and to public sector DB plans in other countries, US state and local plans have not been through a process of de-
risking since 2008, so they have a higher exposure to asset classes in which responsible investment, historically, has seen
more traction. Allocations to equities have fallen, though they remain higher than in private sector DB plans. Weightings in
private equity and real estate have increased (Figure 2). One note of caution; the data is weighted by plan size, so reflects the
concentration in the top 10 plans mentioned above. Individual state and local plans may run their portfolios quite differently
from the average/weighted asset allocation.

Figure 2: Allocations by asset class. Source: Public Plans Database

100%

80%

60%

40%

20%

0%
2003 2008 2013 2018

Equities Fixed income Private equity Real estate

Cash Commodities Hedge fund Misc. Alternatives

The Public Plans Database does not split out infrastructure –which historically has included consideration of environmental
factors -, but these investments are included in the private equity, real estate, other and miscellaneous alternatives
categories. There are 18 public plans included in IPE Real Assets’ list of the top 100 infrastructure investors 2019, and the 10
retirement plans with the biggest defined benefit assets in infrastructure are all in the public sector (Table 3). Allocations to
infrastructure are relatively small, with the exception of Maine Public Employees, and may include energy investments.

Table 3: Allocations to infrastructure investment. Source: Pensions and Investments, the Largest Retirement Funds,
February 4 2019

TOTAL DB ASSETS IN
$ BILLIONS % OF TOTAL DB ASSETS
INFRASTRUCTURE

CalPERS 4,379 (plus 1,360 in forest land) 1.2 (1.5)

CalSTRS 2,769 1.2

Oregon Public Employees 1,772 2.2

New York State Common 1,720 0.8

New York City Retirement 1,614 0.8

Virginia Retirement 1,604 2.0

Maine Public Employees 1,540 10.5

Pennsylvania School Employees 1,254 2.3

South Carolina Public Employees 937 3.0

Michigan Retirement 839 1.2

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 PRIVATE RETIREMENT SYSTEMS AND SUSTAINABILITY: UNITED STATES | 2020

A number of public pension plans manage a high proportion of their assets internally (Table 4).

Table 4: Funds with the most DB assets managed internally. Source: Pensions and Investments, the Largest Retirement
Funds, February 4 2019

TOTAL DB ASSETS IN OF WHICH DOMESTIC

$ BILLIONS % OF TOTAL DB ASSETS
INFRASTRUCTURE EQUITY $ MILLIONS

CalPERS 244,574 64.9 74,859

New York State Common 112,096 52.6 69,576

CalSTRS 103,832 45.1 51,533

Georgia Teachers 77,523 100 40,071

New York State Teachers 73,462 61.2 42,627

Florida State Board 69,918 40.0 37,396

Wisconsin Investment Board 62,528 54.5

New Jersey 58,874 70.2 24,064

Ohio State Teachers 53,894 68.1 18,824

Texas Teachers 48,807 31.9 13,227

North Carolina 47,617 42.8 15,498

Ohio Public Employees 42,276 42.0 18,542

Alabama Retirement 38,533 94.6 21,853

Tennessee Consolidated 34,351 58.9 16,643

Colorado Employees 30,910 57.2 12,355

The asset allocation and investment capabilities of the larger state and local plans should not represent a barrier to
responsible investment. However, there are a number of factors that affect decision-making, including governance structures,
limitations imposed by schemes’ funding positions, and misperceptions around the risk/return implications of responsible
investment.

9
 GOVERNANCE STRUCTURES
State and local funds operate according to statutory and
regulatory frameworks that vary by geography, although
the key elements are fairly uniform. State retirement
systems are generally established by the state constitution,
which also confers authority for pension investment and
administrative oversight on fiduciary boards.8 The California
State Teachers Retirement System was established by the
California Education Code. For cities and counties, local
plans may be subject to additional legislation. For example,
the County Employees Retirement Law of 1937 (known as
the ‘37 Act) provides for retirement systems for California
counties, while the San Francisco Municipal Code defines
benefits and eligibility for the San Francisco City and County
Retirement System.9
These frameworks are not prescriptive in terms of
investment strategy, leaving investment decisions to the
board. It is therefore possible for boards of retirement
systems established under the same legal framework to
adopt different investment principles and strategies. The
PRI have state and local plan signatories in eight states –
California, Connecticut, Hawaii, Maryland, Minnesota, New
York, Vermont and Washington – but even in these states,
not all plans become signatories (for example, Connecticut
SERS is a signatory but Connecticut Municipal is not).
One recent piece of research finds that public plan
boards tend to be relatively large and that they often
prioritize stakeholder representation over technical skills
in composition.10 Most boards include elected member
representatives (active and retired), ex-officio members (e.g.
members of relevant state administrations) and appointed
trustees (appointed by Governors, legislatures or participant
groups such as public school teachers). Boards may
therefore lack the confidence to integrate new approaches
into their investment policy statements (Figure 3).
Figure 3: Board composition. Source: NASRA, Aubry & Crawford
15% Board membership -
by selection process
47% Appointed
38% Elected
Ex-oficio
8 Note a minority of plans may have separate boards for investment and administration, or a single fiduciary
9 Nasra website
10 Does Public Pension Board Composition Impact Returns? JP Aubry & C Crawford, State & Local Pension Plans No.67 August 2019, Center for Retirement Research at Boston College
11 Public Pension Governance That Works, R Miller and R Funston, Funston Advisory Services LLC March 2014
12 Vol. 27, No. 27 | July 2019, “Policies Drive Public Pension Divestments”
13 NASRA, Topics, ESG 2019
14 Update on the Funded Status of State and Local Pension Plans-FY 2018, JP Aubry and C Crawford, Center for Retirement Research at Boston College, October 2019
15 Public Plans database
10
It is possible that governance structures reduce some
boards’ ability to optimise their investment policies. State
legislators may impose limits on headcount or on salaries
that make it harder to recruit investment professionals, so
that less investment activity is managed internally. This is
compounded by the relatively small scale of many plans.
Research from 2014 suggests that larger US public plans
insourced investment management at around half the rate
of Canadian public plans and that insourcing started when
plans reach around $30 billion in assets – currently, over 150
plans on the Public Plans Database are below this level and
only 40 are above it.11
In addition, there is no consistent guidance for public plan
boards that lack internal resources or expertise on how to
approach responsible investment. The National Conference
of State Legislatures’ legisbrief cites five state legislatures
that considered fossil fuel divestment proposals in 2019, but
asks whether these and other screening proposals would
unduly shrink the investment universe.12 Individual plans may
be very active in their sustainable activities, but the National
Association of State Retirement Associations “does not
have a position specifically on ESG”.13
FUNDING POSITION
Funded status does not appear to correlate strongly with
attitudes to responsible investment, although it might be
offered as a reason not to adopt these practices. There is
a wide distribution of funding ratios among state and local
plans, with the top third of funds measured by funded status
having an average funding level of 91% and the bottom
third of only 55%.14 The funded status of the relevant PRI
signatories ranges from under 40% to over 90%. However,
underfunded plans may need to keep some liquidity to pay
benefits, giving them less flexibility to tie up assets in long-
term investments.
15% Board membership -
by stakeholder
31%
General public
Plan participants
54%
Ex-oficio
 PRIVATE RETIREMENT SYSTEMS AND SUSTAINABILITY: UNITED STATES | 2020

PRIVATE SECTOR WORKPLACE

RETIREMENT PLANS
Private sector retirement savings plans accounted for
70% of retirement system assets at the end of Q4 2019,
up from 65% in 1998. Employer-sponsored DB and DC
plans comprise more than a third of system assets, but the
rapid growth in IRAs over the past decade – partly driven
by rollovers from workplace plans when people have left
employment – means that these personal accounts are now
the biggest single component of the retirement market.
In contrast to the public sector, private sector employer-
sponsored retirement provision has moved decisively
from DB to DC. Rules allowing employees to fund 401(k)
plans through payroll deductions were introduced in the
early 1980s, and led to a rapid growth in 401(k) plans,
participants, and assets (Table 5). The percentage of
private sector workers that are only members of DB plans
declined from 28% in 1979 to just 1% in 2018, while those
participating only in DC plans have risen from 7% to 40%
over the same period.16

Table 5: Growth of 401(k) plans. Source: EBSA Private Pension Plan Bulletin December 2018, Public Plans Database

DB DC
INCLUDES,
TOTAL SINGLE MULTI SINGLE MULTI 401 (K)
EMPLOYER EMPLOYER EMPLOYER EMPLOYER

Number of plans 1984 604,434 165,732 2,283 435,681 738 17,303

2016 702,540 44,888 1,412 555,017 1,224 560,373

Number of active 1984 60,618 24,216 5,857 29,670 875 7,526

participants (‘000)
2016 93,851 9,689 4,177 76,562 3,423 67,121

Assets ($m) 1984 1,044,592 608,703 91,966 338,670 5,246 91,754

2016 8,614,940 2,401,195 522,038 5,484,618 207,089 4,738,481

DEFINED BENEFIT PLANS

Table 6 indicates that there has been considerable consolidation in the occupational DB sector, with the number of plans
falling by roughly three-quarters between 1984 and 2016. Assets quadrupled over the same period. Indeed, the 100 largest
corporate DB plans hold more than $1.5 trillion of assets, almost half the sector total.17 The 10 largest plans are shown in Table
6. None are PRI signatories (although DowDuPont’s asset manager DuPont Capital is a signatory).

Table 6: Largest private sector occupational DB plans. Source: Pensions & Investments, The Largest Retirement Funds,
February 2019

SPONSOR ASSETS $ MILLIONS SPONSOR ASSETS $ MILLIONS

AT&T 58,651 IBM 49,207

GM 64,199 UPS 41,253

Boeing 59,700 Lockheed Martin 33,159

Ford Motor 57,710 Kaiser 31,376

GE 54,259 DowDuPont 30,510

16 Putting Numbers to the Shifting Retirement Landscape, EBRI Fast Facts, January 23rd 2020
17 Milliman 2019 Corporate Pension Funding Study

11
 DB plan participation has been in decline throughout this
period. As of 2017, some 25% of members were in plans that
were closed to new hires and 12% were in plans that were
frozen to new benefit accrual. Despite this, assets remained
significant and continued to grow thanks to market returns
and employer contributions.18
In common with UK DB plans, US private sector DB plans
have reduced equity allocations in favour of fixed income
and other asset classes (Figure 4); they have also derisked
through initiatives including liability-driven investing (LDI),
buyouts and “lump sum window” programmes.

Figure 4: Change in asset allocation over time. Source: Milliman 2019 Corporate Pension Funding Study
100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Equities Fixed Other

The increasing allocation to fixed income appears to reflect adoption of LDI strategies. “Other” asset classes include private
equity, real estate, commodities, hedge funds, and cash or equivalents.

18 Bureau of Labour Statistics TED September 29 2017

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 PRIVATE RETIREMENT SYSTEMS AND SUSTAINABILITY: UNITED STATES | 2020

DB VALUE CHAIN
Control of private sector occupational defined benefit funds rests with the sponsor (employer). Although the assets are held
in a trust fund, independent of the sponsor, plan fiduciaries are almost always corporate officers (Figure 5). Sponsors use
a range of actuarial, investment, and employee benefits advisors to ensure that the needs of the plan and the needs of the
company are as aligned as possible.

Figure 5: DB governance and value chain

Actuarial consultant Employer (sponsor)

Advice on funding strategy,
monitor investment strategy

Retirement plan

Investment Trust fund Administrative

committee (holds assets) committee

OCIO
Investment consultant
Investment advice, Recordkeeper
Investment advice
investment implementation
Track flows into plan

Asset
Custodian Track flows out of plan
managers

Underlying Employees
assets (members)

Increasingly, DB plans are using Outsourced Chief Investment Officer (OCIO) services to manage their investment function
– OCIO managers are responsible for implementing investment policy and contributing to its development. Corporate DB
assets under OCIO management are estimated at $600 billion, with a forecast growth rate of 5% per annum.19 Confirming the
trend away from DB provision, corporate DB plans look to OCIO to help them simplify and exit their pension obligations, but
not to advise them on ESG investing. By contrast, ESG capabilities are the primary interest of endowments and foundations
(“Non-profits” in Table 7 below).

Table 7: Investment capabilities that institutions foresee needing greater support with, in the next 3-5 years. Source:
Cerulli Associates, as of 02/28/2019

CORPORATE
INVESTMENT CAPABILITIES TOTAL NONPROFITS
DB PLANS

ESG capabilities 43% 69% 0%

Advice on pension end-game 26% 0% 75%

Access to alternatives 22% 31% 0%

Asset allocation 9% 8% 13%

Pension-specific capabilites (LDI, custom glidepath) 4% 0% 13%

Passive management 4% 0% 13%

19 Cerulli Associates | OCIO at an Inflection Point, 2019

13
 DEFINED CONTRIBUTION PLANS
Private sector occupational defined contribution has been
dominated by 401(k) plans with $6.2 trillion in assets,
alongside other types of DC plan (Keoghs, profit-sharing,
stock bonus, money purchase) totalling $560 billion as of
2016.
Employers are not required to offer a 401(k) plan to
their employees, but plans are used as part of the overall
recruitment and retention package. Since the Pension
Protection Act of 2006 facilitated automatic enrolment, the
number and coverage of 401(k) plans has grown rapidly to
more than 560,000, with 67 million active participants at the
end of 2016. However, the market is relatively concentrated,
with the 801 largest plans (by number of participants)
representing 40% of total participants and 42% of total
assets (Table 8).

Table 8: Distribution of 401(k) plans, participants and assets. Source: The Brightscope/ICI Defined Contribution Plan
Profile: A Close Look at 401(k) Plans, 2016

DEPARTMENT OF LABOR 401(K) UNIVERSE

NUMBER OF PLAN PLANS PARTICIPANTS ASSETS

PARTICIPANTS NUMBER ‘000 $ BILLIONS

< 100 503,416 9,529 707

100 – 499 43,493 8,928 489

500 – 999 6,156 4,276 250

1,000 – 4,999 5,601 11,692 808

5,000 – 9,999 821 5,680 458

10,000+ 801 26,986 2,025

All plans 560,288 67,091 4,737

The largest 401(k) plans by assets are shown below, none are PRI signatories (Table 9).

Table 9: Largest 401(k) plans. Source: Pensions & Investments, The Largest Retirement Funds, February 2019

SPONSOR ASSETS $ MILLIONS SPONSOR ASSETS $ MILLIONS

Boeing 64,000 GE 26,695

IBM 54,047 UPS 24,991

Wells Fargo 42,900 Northrop Grumman 21,584

Lockheed Martin 33,033 United Technologies 20,658

JP Morgan Chase 28,744 United Continental Holdings 20,575

14
 PRIVATE RETIREMENT SYSTEMS AND SUSTAINABILITY: UNITED STATES | 2020

Plan sponsors are responsible for plan design and for the
investment options offered. Key variables in plan design
include whether or not employees are automatically
enrolled, whether or not the employer makes contributions,
and whether or not the plan makes loans.
Employees who are automatically enrolled are likely to
use the plan’s default option. In 2007 the Department
of Labor provided guidance on the Qualified Default
Investment Alternative (“QDIA”) strategies that could
be used as defaults. QDIA must include a mix of asset
classes that provide capital preservation and/or long-term
capital appreciation, and they must take into account the
characteristics of either the member (via a target date fund
(“TDF”) or a managed account) or the relevant group of
members (via a balanced fund).
This has helped to support the rapid development of
automatic enrolment and of TDFs: by 2016, over half of
plans with more than $250 million in assets automatically
enrolled members and more than half of 401(k) participants
held a TDF, up from less than 20% in 2006. Some 21%
of 401(k) assets were in TDFs, rising to 49% of assets of
recently-hired 401(k) participants in their 20s, indicating the
predominance of TDFs among default investment options.
It is important in any efforts to make the US retirement
system more sustainable that TDFs are considered.
However, initiatives to develop “ESG-themed” TDFs have
been held back by concerns that these might breach
fiduciary requirements, following the publication of EBSA’s
Field Assistance Bulletin No.2018-01. The Bulletin advises
that the Employee Retirement Income Security Act of
1974 (ERISA) does not necessarily require plans to adopt
investment policy statements with express guidelines on
ESG factors, and suggests that offering a ESG-themed
option as a QDIA could breach the duty of loyalty as it would
reflect the investment policy preferences of the fiduciary
rather than those of the participants.
The bulletin suggests that it would not be prudent to
offer an ESG-themed TDF as a QDIA unless it could
be established that its risk-return characteristics were
equivalent to a non-ESG alternative option. This has made
plan sponsors and their advisers reluctant to introduce such
funds, especially in a highly litigious environment.
Still, the 2015 Interpretive Bulletin (IB) stated that when
ESG factors have economic value, they are “more than
just tie-breakers, but rather are proper components of
the fiduciary’s analysis of the economic and financial
merits of competing investment choices”. Similarly, in
2016, the Department issued IB 2016-1, which confirmed
that ESG issues were consistent with shareholder
engagement under ERISA.20 The underlying law remains
the same; however, the interpretation/guidance changes,
with favourable or unfavourable language depending on the
administration.
For plan participants who do not want to be automatically
enrolled into a default fund, sponsors make available a
range of other investment options. On average, 401(k)
plans offered a menu of 20 funds, plus one or more TDFs.
The most common offerings are domestic equity and bond
funds, offered by 99.6% and 97.4% of plans respectively
(Table 10). Over one third of 401(k) assets are held in US
equity funds. Here again Field Assistance Bulletin No. 2018-
01 potentially discourages, but does not preclude, sponsors
from adding an ESG-themed option to their self-select
menus. However, that requires an additional level of due
diligence and confidence that it does not “require the plan to
remove or forego adding other non-ESG themed investment
options to the platform”.

Table 10: 401(k) asset class breakdown. Source: The Brightscope/ICI Defined Contribution Plan Profile: A Close Look at
401(k) Plans, 2016

MONEY MEMO
EQUITY FUNDS BALANCED FUNDS BOND FUNDS GICs OTHER
FUND INDEX

DOMESTIC INTERNATIONAL TDF NON-TDF DOMESTIC INTERNATIONAL

% of plans 99.6 96.3 80.1 65.4 97.4 30.3 44.2 68.6 64.2 91.3
offering

Average number 10.1 2.6 7.4 1.5 2.9 0.3 0.5 0.7 1
of options

% of total assets 36.3 6.6 21.3 3.2 6.7 0.3 1.9 8.9 14.8 33.2

Data applies to Brightscope universe. GIC = Guaranteed Investment Contract. Other = commodities, Real Estate, individual stocks and bonds

20 https://www.unpri.org/news-and-press/ebsa-issues-new-guidance-on-esg-shareholder-engagement-by-plan-fiduciaries/3033.article

15
 Employers also choose the investment vehicles for each
option. Some 45% of 401(k) assets were held through
mutual funds in 2016, although the largest funds were
more likely to use Collective Investment Trusts than mutual
funds. CITs are pooled vehicles similar to mutual funds but
are only available to qualified retirement plans. They are
cheaper than mutual funds and may offer opportunities for
customisation. The largest plans tend to have a relatively
high allocation to sponsor stock; on average 21% of assets
for plans with more than $1 billion in assets.
Vanguard reported that of the 1,900 plans for which it
was the recordkeeper in July 2019, 9% offered a socially
responsible domestic equity option, rising to 19% among the
largest plans (more than 5,000 participants). This meant
that 23% of the 5 million participants served by Vanguard
were offered this option. Of these, only 4% selected
the option, so just 50,000 participants on Vanguard’s
recordkeeping platform were invested in socially responsible
equity funds.21 Similarly, a 2019 survey of advisers for
401(k) plans by the Financial Times (FT) found that only
15% of sponsors offered ESG or impact investing options,
and that only 3.4% of these plans’ assets were held in such
strategies.22 According to the Callan DC index, only 5% of
corporate DC plans offered a standalone ESG option in
2018, compared with 43% of public and non-profit plans,
while take-up of corporate DC plans was just 1.2%.23
21 Vanguard, How America Saves 2019
22 FT Special Report, 401 Retirement Advisers October 10 2019
23 Callan blog, 05/29/18
24 Note, the Secure Choice program is subject to challenge in the courts
16
The FT survey finds that attitudes to ESG options are
evolving, as asset managers provide more resources to help
support decisions and as the demographics of the workforce
change. However, concern over the DOL guidance, potential
controversy and litigation, and the lengthy decision-making
processes of 401(k) committees means that adoption will be
slow.
A number of states, including Oregon, California and Illinois,
have established state-facilitated payroll deduction IRA
programs for private sector employees without retirement
plan options.24 These Secure Choice programmes could
create significant pools of assets and relieve employers
of the fiduciary responsibilities of 401(k) plans. It is likely
that the programmes, like 401(k) investments, will be
geared towards low-cost, passive investment options. The
SECURE Act, effective January 2020, will make it easier
for small businesses to join private-sector multi-employer
funds and could eventually lead to large asset pools as
providers consolidate funds and encourage new employers
to participate, as we have seen with contract-based
occupational DC providers in the UK.
 PRIVATE RETIREMENT SYSTEMS AND SUSTAINABILITY: UNITED STATES | 2020
DC VALUE CHAIN
The value chain for a 401(k) plan revolves around the
sponsor. As the named fiduciary, the sponsor is ultimately
responsible for the investment line-up. As the proportion
of participants automatically enrolled into the QDIA rises,
the selection of the default manager – and, where the QDIA
is a TDF or a balanced fund, that manager’s selection of
underlying instruments – will be the primary determinants
of how much attention is given to ESG factors in the
investment of DC assets.
Figure 6: DC governance and value chain
UNBUNDLED Employer (sponsor)
Retirement plan
Investment
Trustee
consultant
May use ICIO
Choice TDF
Recordkeeper
Underlying
strategies
Employees
In practice, sponsors follow the recommendations of
investment consultants, use OCIO, or employ other advisers
in determining investments. Advisers also play an important
role in plan design and in helping employees make decisions
about their investments, including when they leave a
plan. According to the Retirement Adviser University (a
professional education provider in collaboration with UCLA
Andersen School of Management) specialist plan advisers
work with employers covering roughly two-thirds of DC
plan assets. These advisers consult with sponsors on their
fiduciary responsibilities and provide advice on plan design,
investment design, employee communication and education,
and financial wellness.
25 FT survey op cit.
26 McKinsey 2019
Large DC plan sponsors often operate the plan themselves,
creating committee structures to manage business
functions and appointing trustees to manage the plan’s
assets. Still, almost all plans engage third-party investment
managers, administrators, and trustees to carry out day-to-
day management (Figure 6). Depending on their role, third
parties may have some fiduciary responsibilities, without
relieving the sponsor of their obligations. Legal counsels
often play an important role in DC plan management,
reflecting the risk of litigation if sponsors fail to meet their
fiduciary duties.
BUNDLED
Recordkeeper
Proprietary
Trustee
Investment fund
Other QDIA Choice TDF Other QDIA
Underlying
strategies
Advisers may be sole practitioners or part of a larger
financial services firm. There is a trend towards
consolidation and M&A activity, although in a large part the
market remains fragmented and localised.25
DC plan assets generate almost $30 billion in revenues
for recordkeepers and asset managers. Both services are
dominated by a small group of large players, with a long tail
of smaller providers. These may specialise in a particular
sponsor type (for example smaller employers) or
asset class.26
17
 SERVICE PROVIDERS

Service providers play an important role in the US private
retirement system. Most public and private sector
retirement plans use external asset managers, investment
consultants and record keepers for a variety of functions.
ASSET MANAGERS
Retirement plan assets are often managed by a relatively
small group of investment managers. The top 10 asset
managers for DB plans are responsible for more than 20%
of DB assets and the top 10 asset managers for DC plans for
more than 50% of DC assets (Table 11).
There is a trend towards concentration in DC asset
management (not just private sector). At the end of June
2019, the 40 largest asset managers had $6.4 trillion of
DC assets, with the five largest responsible for over $4
trillion (Figure 7). The top five DC managers by assets were
Vanguard ($1.4 trillion), Blackrock ($954 billion), Fidelity
($773 billion), T Rowe Price, and Nuveen ($500 billion
each).27 The five next biggest were Capital Group, State
Street Global Advisers, Prudential Financial, JPMorgan Asset
Management, and Northern Trust Asset Management. All are
PRI signatories.

Figure 7: DC manager AUM (billions). Source: P&I online, October 31 2019

7500 70%

6500
65%

5500

60%
4500

3500 55%

2500
50%

1500

45%
500

-500 40%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
H1
Manager 6-40 Top 5 Managers Top 5 as % of Top 40

27 Source: P&I online, company websites

18
 PRIVATE RETIREMENT SYSTEMS AND SUSTAINABILITY: UNITED STATES | 2020

The top ten asset managers could play a major role in A study by Cerulli found that “an estimated 88% of total US
making the US retirement system more sustainable. public market assets, including publicly traded equity, fixed-
However, recent research found that the biggest three income and liquid alternative funds, are affiliated with a PRI
passive fund managers globally have stewardship budgets signatory, yet only 4.5% of firms managing those assets say
that are only 0.2% of the estimated fees that they earn from in their official documents that ESG considerations inform
managing equity assets, and that there was no real incentive their investment decisions”.32 This does not necessarily
for them to do more.28 Indeed, a report by InfluenceMap reflect bad will on the part of signatories; rather the threat
highlighted the relatively weak performance of many of lawsuits if they cannot precisely match their investment
large US asset managers in terms of alignment with the outcomes to the language in their documentation.
Paris Agreement.29 Similarly, Majority Action found that
BlackRock and Vanguard had a particularly poor voting Seven of the top 10 DB and DC managers in the US are PRI
record on climate-related US shareholder proposals in 2019, signatories; Prudential and Legg Mason have subsidiaries
and both firms failed to support the three proposals at that are signatories; NISA is not a signatory.
Exxon, Ford and GM that were backed by the Climate Action
100+ investor coalition (neither did JPMorgan AM, Goldman
Sachs and Northern Trust).30 The Securities and Exchange
Commission has suggested changes to shareholder proposal
rules and the role of proxy advisory firms. These would
further reduce the number of proposals submitted to
issuers and increase the voting power of asset managers
relative to asset owners.31

Table 11: Top asset managers of US retirement assets. Source: P&I The Largest Money Managers, May 27 2019

MANAGERS OF DB MANAGERS OF DC
ASSETS $ MILLION ASSETS $ MILLION
ASSETS* ASSETS*

1 BlackRock 540,875 1 Vanguard Group 1,176,384

2 State Street Global 356,831 2 BlackRock 829,826

3 Prudential Financial 194,996 3 Fidelity Investments 666,396

4 PIMCO 170,700 4 Nuveen 507,797

5 NISA Investment 158,295 5 T Rowe Price 413,122

6 JP Morgan AM 149,219 6 Capital Group 366,471

7 BNY Mellon 148,400 7 State Street Global 297,272

8 Goldman Sachs Group 110,983 8 Prudential Financial 221,916

9 Legg Mason 110,107 9 JP Morgan AM 194,729

10 Northern Trust AM 100,171 10 Northern Trust AM 166,334

Data as at year end 2018. *US institutional, tax-exempt assets managed internally

28 Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy, Lucian Bebchuk and Scott Hirst, 2019
29 Asset Managers and Climate Change, InfluenceMap, November 2019
30 Climate in the Boardroom, Climate Action, 2019. Note that BlackRock has since joined Climate Action 100+
31 Financial Times, October 25, 2019
32 P&I magazine, November 25, 2019

19
 RECORDKEEPERS
Recordkeepers provide administration services for both DB
and DC plans, including maintaining plan records, processing
employee contributions and distributions, and running plan
analytics; they may also offer corporate trustee and other
fiduciary services. For plan participants, recordkeepers
provide member services such as statements and call
centres and may offer additional financial products such as
annuities that are outside the sponsor’s design.
Pure-play recordkeepers are more likely to win business
with either very small or very large plans. Overall, asset
managers provided recordkeeping services for 30% of
401(k) assets in 2016, and 58% of assets in plans worth
more than $1 billion. For insurance companies, the figures
were 48% and 15%; for pure recordkeepers, 11% and 17%; for
banks 7% and 7%; brokerage firms made up the rest of the
market.33

Recordkeepers can play a larger role in DC plans, providing
trustee and/or investment services in addition to
administration. Larger plans in particular are likely to use an
asset manager as their recordkeeper while smaller plans are
more likely to use insurance companies and mid-sized plans
tend to use banks.
Fidelity Investments is the largest recordkeeper in terms of
DC assets, 401(k) assets, and DC participants. It is the tenth
largest in terms of DC plans serviced, implying that it is
recordkeeper to larger 401(k) plans (Table 12).

Table 12: 2019 Top Recordkeepers. Source: Plans Sponsor 2019 Recordkeeping survey

TOTAL DC ASSETS ($BN)* 401 (K) ASSETS (BN) TOTAL DC PLANS* TOTAL DC PARTICIPANTS*

1 Fidelity 1,917 Fidelity 1636 Paychex Inc 84,477 Fidelity 22,284,450

investments investments Investments
2 TIAA 606 Empower 400 American Funds 57,809 Empower 8,657,754
Retirement Retirement
3 Empower 540 Alight Solutions 376 Voya Financial 49,585 TIAA 6,328,347
Retirement
4 The Vanguard 454 The Vanguard 375 ADP Retirement 48,788 Principle 5,595,743
Group Inc Group Inc Services Financial Group
5 Alight Solutions 444 Voya Financial 196 J Hancock Rtmt 47,807 Voya Financial 5,091,559
Plan Services
6 Voya Financial 309 Wells Farge 191 Ascensus 42,384 The Vanguard 4,932,156
Group Inc
7 Principle 216 T Rowe Price 159 Principle 41,992 Alight Solutions 4,822,800
Financial Group Financial Group
8 Wells Farge 213 Prudential 147 Empower 38,434 Bank of America 4,500,867
Retirement Retirement
9 Bank of America 204 Bank of America 147 Nationwide 35,578 Transamerica 4,072,603

10 Prudential 203 Principle 143 Fidelity 33,544 Wells Fargo 3,461,255

Retirement Financial Group Investments

* Includes public sector

Research indicates that integrated providers have a
competitive advantage, in that mutual funds provided by
the recordkeeper are more likely to be added to, and less
likely to be deleted from, the plan’s investment menu than
similarly-performing funds from rival asset managers.34
Still, recordkeeper fee structures and fund costs relative to
competitor offerings are coming under increased scrutiny.
Recent data indicates that the number of fully-bundled plans
(in which the recordkeeper also provides trustee services
and manages all the investment funds) is declining.35 Many
plans remain partially bundled (not all investment funds are
managed by the recordkeeper).
DC assets in proprietary mutual funds totalled $3.19 trillion
at the end of H1 2019, of which proprietary TDF mutual
funds were about a quarter. The value of proprietary TDF
strategies combined (mutual funds, commingled accounts,
separate accounts) totalled $1.7 trillion. DC plans with over
$1 billion in assets are more likely to be fully unbundled,
i.e. the recordkeeper, trustee, and investment funds are
independent of each other.

33 All data Brightscope/ICI op cit

34 It Pays to Set the Menu: Mutual Fund Investment Options in 401(k) Plan, TIAA Institute 2015; Menu Choices in DC Pension Plans, NBER Reporter 2015 No. 4
35 Callan DC Trends Survey 2019

20
 PRIVATE RETIREMENT SYSTEMS AND SUSTAINABILITY: UNITED STATES | 2020

INVESTMENT CONSULTANTS
US investment consultants are regulated by the SEC
but take on some fiduciary responsibilities under ERISA
when sponsors take their advice on investment strategy.36
Investment consultants advised on nearly $23 trillion of US
institutional, tax-exempt advisory assets as of June 2019.37
The market for investment consultants is concentrated;
the top 10 firms advise on more than 80% of assets and the
top 20 on more than 90% (Table 13). Much like sponsors,
consultants are cautious in recommending responsible
investment strategies in the current regulatory and litigation
environment.
In addition, consultants usually do not include investment
strategies in their watch lists until they have a three-year
track record. However, international consulting firms are
beginning to transfer knowledge from the EU – where there
is more demand for responsible investment advice. Of the
top 10 consulting firms by assets, five are US-focused and
five are international.
OCIO assets managed by consultants have almost doubled
over the past five years to $1.4 billion.

Table 13: Top 10 consulting firms by US institutional, tax-exempt advisory assets. Source: P&I Special Report Investment
Consultants, November 2019

INTERNATIONAL/ TOTAL ASSETS DB DC PRI

RANK CONSULTANT
AMERICAS $ BILLIONS $ BILLIONS $ BILLIONS IGNATORY

1 Mercer International 4,246 1,062 1,079 yes

2 Aon International 2,947 yes

3 Callan US 2,507 1,807 324 yes

4 RVK US 2,197 1,420 714

5 Meketa Investment Group US 1,976 yes

6 NEPC US 1,068 695 178 yes

7 Wilshire Associates International 983 884 38 yes

8 Cambridge Associates International 953 yes

9 Russell Investments International 729 yes

10 Rocaton Investment Advisers US 583 147 228

36 Jenner & Block, Practice Series, ERISA Litigation Handbook, 2012

37 Source: P&I Special Report, note includes non-pension assets

21
 REGULATORY FRAMEWORK

All private sector employer-sponsored plans come under
the ERISA framework. ERISA requires that plan fiduciaries
ensure that the plan is run solely in the interests of
participants and beneficiaries and for the exclusive purpose
of providing benefits and paying plan expenses. They must
act prudently, diversify the plan’s investments to reduce the
risk of large losses, and avoid conflicts of interest.38
Plan sponsors retain ultimate fiduciary responsibility, even
when they delegate both administration and investment
decisions to third parties. Sponsors are therefore the key to
the value chain in both DB and DC private sector workplace
retirement plans. This is in contrast to jurisdictions such
as the UK, where plan fiduciaries are independent of the
sponsor. However, under the existing regulatory framework
in the US, there may be a tension between the sponsor’s
responsibilities towards shareholders and its responsibilities
towards plan participants This may discourage investment
innovation in general and responsible investment in
particular.
The tension should be less problematic in DB plans,
where the sponsor promises employees a pre-determined
retirement income and is responsible for delivering it. In
DC plans, by contrast, the sponsor is responsible for the
plan design and investment menu, but does not offer any
guarantee in respect of the outcome. When participants
are disappointed with the performance of the fiduciary they
may take legal action against the sponsor. For corporate
officers who serve as plan fiduciaries, there is a strong
incentive to avoid any action that may lead to the sponsor
being sued and a strong disincentive to offer a plan that
deviates from the “average”.
In conclusion, while ERISA in principle leaves scope
for a broad range of investment strategies (as long as
investment decisions are well-researched and documented
to demonstrate their compliance with fiduciary
responsibilities), in practice it offers few incentives to
develop new growth investment strategies. For example,
a fund that screens out “bad” companies could fail the
fiduciary requirement of prudence, because it restricts the
investment universe and so is less diversified than funds
that do not screen. An impact investment strategy could
fail the “sole purpose” test by being categorised as an
“economically targeted investment” (investments selected
for the economic benefits they create apart from their
investment return to the employee benefit plan). Sponsors
are potentially opening themselves up to challenge from
employees if they offer responsible investment options that
subsequently underperform, even if employees have other,
non-ESG options available.
The DOL is also considering rules, similar to those proposed
by the SEC, that would limit the ability of trustees to use
proxy voting services and shareholder activism where the
retirement plan is just one among many investors.41

Fiduciaries have come under increasing scrutiny for

how they select and monitor their service providers
and investment strategies. Fiduciaries of 401(k) plans in
particular have faced legal challenges for failing to control
costs and fees. The Supreme Court ruled in 2015 that
trustees had a “continuing duty to monitor” the investment
options offered to plan participants39 and class action
lawsuits have resulted in significant settlements, including
Lockheed Martin ($62 million, 2015), American Airlines ($22
million, 2017), and Allianz Asset Management of America
($12 million, 2018). This has contributed to a focus on cost
in plan design and increased use of passive investments:
33% of 401(k) assets are now held through index funds. A
2019 PIMCO study of plan advisors servicing more than $4.9
trillion of DC assets found that the priority demands from
clients were to review the TDF and check investment and
administration fees.40

38 See Fiduciary Duty in the 21st Century for detailed analysis

39 Supreme Court of the United States, Tibble et al. v. Edison International et al, October 2014
40 PIMCO DC Consulting Study, April 2019
41 Plan Sponsor, December 12 2019

22
 PRIVATE RETIREMENT SYSTEMS AND SUSTAINABILITY: UNITED STATES | 2020

INDIVIDUAL RETIREMENT ACCOUNTS

IRA assets totalled an estimated $11 trillion at the end of
2018. Over a third of US retirement system assets and a
third of US households had at least one IRA account.
Traditional IRAs were established under ERISA to; (1) give
workers not covered by an occupational plan a means to
save for retirement, and; (2) give participants in employer-
sponsored plans the possibility of preserving their assets
and their tax advantages if they retire or change jobs, by
allowing them to roll over their plan balances into an IRA.
Savings into traditional IRAs are tax-free, while withdrawals
are taxed. Roth IRAs were introduced in 1998; contributions
are taxed, and withdrawals are tax-free. Employer-
sponsored IRAs (SEP, SAR-SEP and SIMPLE IRAs) are
designed to encourage small businesses to provide
retirement plans.
The bulk of IRA assets are held in traditional IRAs, and most
assets have come from rollovers from employer-sponsored
retirement plans (Figure 8).

Figure 8: Households holding IRAs and assets. Sources: ICI Research Perspective “The Role of IRAs in US Households’
Saving for Retirement. 2018” and “The US Retirement Market, Fourth Quarter 2018”

NUMBER OF US PERCENTAGE OF US ASSETS IN IRAs

YEAR CREATED HOUSEHOLDS WITH HOUSEHOLDS WITH (BILLIONS OF DOLLARS,
TYPE OF IRA (2018) TYPE OF IRA (2018) YEAR-END 2018)

1974
Traditional IRA (Employee Retirement Income 33.2 million 26.0% $7,496*
Security Act)

1978
SEP IRA
(Revenue Act)

1986
SAR-SEP IRA 7.5 million 5.9% $510*
(Tax Reform Act)

1996
SIMPLE IRA
(Small Business Job Protection Act)

1997
ROTH IRA 22.5 million 17.6% $800*
(Taxpayer Relief Act)

ANY IRA 42.6 million 33.4% $8,806*

* data are estimated

Households may own more than one type of IRA. SEP IRAs, SAR-SEP IRAs, and SIMPLE IRAs are employer sponsored IRAs.

According to the 2016 EBRI database, 34% of traditional
IRA accounts originated from contributions and the average
account balance was $97,515; some 30.7% of accounts
originated from rollovers and the average account balance
was $133,353. Each type of account could have received
rollovers or contributions or both since inception.42 Inflows
from rollovers were $148 billion in 2016, compared to $9
billion from contributions (which are subject to an annual
limit).
IRAs can be administered by a variety of financial
institutions, including brokerage houses, mutual fund
companies, and banks. The importance of rollovers in IRA
savings may give an advantage to recordkeepers and other
service providers associated with employer-sponsored
retirement plans.
The GAO found in 2013 that, “Plan participants are often
subject to biased information and aggressive marketing of
IRAs when seeking assistance and information regarding
what to do with their 401(k) plan savings…in many cases,
such information and marketing come from plan service
providers.”43 Research by Cerulli in 2014 indicated that two-
thirds of rollovers went to firms with which the individual
had an existing relationship. The EBRI found that asset
allocation changes significantly when the funds are rolled
over from a 401(k) to an IRA, implying that the financial
institution receiving the funds has an influence over how
they are invested.44 All of these examples underline the
dominance of financial institutions relative to individuals in
investment decisions.

42 EBRI Issue Brief no. 456, August 13 2018: IRA Balances, Contributions, Rollovers, Withdrawals, and Asset Allocation, 2016 Update
43 401(k) Plans: Labour and IRS could Improve the Rollover Process for Participants, GAO March 2013
44 EBRI Issue Brief, November 7 2019

23
 In 2018, 70% of households that owned traditional IRA accounts held them through an investment professional and 30% held
them directly through accounts opened with a mutual fund company or a discount brokerage (Figure 9).45

Figure 9: Traditional IRAs are held through a variety of FIs. Source: Investment Company Institute IRA Owners Survey

Investment professionals (total) 70

Full-service brokerage 30

Independent financial planning firm 22 70%

Investment professionals
Bank or savings institution 25 (total)

Insurance company 7

Direct market (total) 31

31%
Mutual fund company 21 Direct market
(total)

Discount brokerage (total) 13

Multiple responses are included

In addition to choosing where to hold their IRA, individuals Over 50% of IRA assets are held in equities and equity funds.
must choose how to invest it. Usually, they will have many Older IRA account holders hold more bond funds and bonds
more investment options than in a 401(k), where the than younger investors (Figure 10).
menu has been pre-selected by the sponsor. Mutual fund
companies will typically offer a large range of proprietary Figure 10: Traditional IRA asset allocations. Source:
funds; banks and credit unions can only offer a limited range Investment Company Institute, The US Retirement
of investment instruments; but all three types of institution Market, 2nd quarter 2019
can offer an almost unlimited choice of funds from any asset
manager if they have a brokerage division. Discount brokers 100%
are not tied to any investment manager. Most individuals use
a financial adviser to help them navigate the vast range of 80%
options.

Registered Investment Advisers (RIAs) are people or firms 60%

that are regulated by the SEC and have a fiduciary duty
towards their clients to provide suitable advice and act in
40%
their best interests (the standards are generally considerably
lower for the relationship between broker-dealers and
their retail clients).46 The adviser market is fragmented and 20%
advisers may offer services other than IRAs (such as advice
on 401(k) or other wealth management activities). There
are an estimated 10,000+ RIAs, with 52 firms having client 0%
assets of more than $5 billion and another 338 having client Investors in their 30s Investors in their 60s
assets of more than $1 billion.47 There is considerable M&A
activity in the sector and Cerulli estimates that a further
Equities and equity funds TDF Money Market funds Other
$2.4 billion of assets could be consolidated through mergers
and rollups. Non-TDF balanced funds Bonds and bond funds

45 Note: full service broker gives research and advice.

46 Securities and Exchange Commission, Commission Interpretation Regarding Standard of Conduct for Investment Advisers, 2019
47 All data from article “RIAs acquiring firms at record pace”, Investment News, September 28 2019

24
 PRIVATE RETIREMENT SYSTEMS AND SUSTAINABILITY: UNITED STATES | 2020

To the extent that many IRA accounts are held at brokerages and mutual fund companies, and that 45% of IRA assets are held
in mutual funds, it is likely that the same asset managers that dominate the DC market also dominate the IRA market
(Figure 11).

Figure 11: IRA Value chain.

Financial adviser
(if independent
from IRA provider)

Former Sponsor’s
INDIVIDUAL
recordkeeper

IRA provider (brokerage,

Mutual fund
mutual fund company,
Funds providers
financial planning firm...)
Service

25
 CREDITS
AUTHOR:
■ Emmy Labovitch, Independent consultant
■ Nikolaj Halkjær Pedersen, Senior
Specialist, Sustainable Markets, PRI

EDITOR:
■ David Wigan

DESIGN:
■ Will Stewart, PRI

26
The Principles for Responsible Investment (PRI)

The PRI works with its international network of signatories to put the six Principles
for Responsible Investment into practice. Its goals are to understand the investment
implications of environmental, social and governance (ESG) issues and to support
signatories in integrating these issues into investment and ownership decisions. The
PRI acts in the long-term interests of its signatories, of the financial markets and
economies in which they operate and ultimately of the environment and society as
a whole.

The six Principles for Responsible Investment are a voluntary and aspirational set of
investment principles that offer a menu of possible actions for incorporating ESG is-
sues into investment practice. The Principles were developed by investors, for inves-
tors. In implementing them, signatories contribute to developing a more sustainable
global financial system.

More information: www.unpri.org

The PRI is an investor initiative in partnership with

UNEP Finance Initiative and the UN Global Compact.

United Nations Environment Programme Finance Initiative (UNEP FI)

UNEP FI is a unique partnership between the United Nations Environment Programme

(UNEP) and the global financial sector. UNEP FI works closely with over 200
financial institutions that are signatories to the UNEP FI Statement on Sustainable
Development, and a range of partner organisations, to develop and promote linkages
between sustainability and financial performance. Through peer-to-peer networks,
research and training, UNEP FI carries out its mission to identify, promote, and realise
the adoption of best environmental and sustainability practice at all levels of financial
institution operations.

More information: www.unepfi.org

United Nations Global Compact

The United Nations Global Compact is a call to companies everywhere to align their
operations and strategies with ten universally accepted principles in the areas of hu-
man rights, labour, environment and anti-corruption, and to take action in support
of UN goals and issues embodied in the Sustainable Development Goals. The UN
Global Compact is a leadership platform for the development, implementation and
disclosure of responsible corporate practices. Launched in 2000, it is the largest cor-
porate sustainability initiative in the world, with more than 8,800 companies and
4,000 non-business signatories based in over 160 countries, and more than 80 Local
Networks.

More information: www.unglobalcompact.org